When Salaries Aren’t Secret

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It had all happened so fast. Hunched forward, elbows on the desk, Hank let his chin sink deeper into his hands as he gazed out into the night. Outside, the flowers in the office-park garden looked garish under the orange sodium-vapor lights. Hank didn’t notice. He was thinking hard about tomorrow’s staff meeting, which had so suddenly been transformed from a celebration into a—well, he wasn’t quite sure what. He just knew it wouldn’t be pleasant.

Hank Adamson, 48, was chief executive officer of RightNow!, a retail chain specializing in off-price clothing for young, fashion-minded women. Frankly, he had been looking forward to a little celebration. Five years ago, his company had bought out a stodgy, 20-year-old retailer of women’s apparel, and Hank had come in to run the place.

He renamed it and repositioned it, giving it a hip, edgy style. (Get Your Clothes Half Off was the latest slogan, with a racy ad campaign to match). He invested in rapid growth: RightNow! today had stores in 28 states, with more on the way. Last year, Hank had hired a dozen or so tech-savvy 20-somethings and charged them with creating a killer Web site. Launched just last month, the site was already winning awards and generating substantial business. He’d heard that even the folks in corporate were impressed.

But oh, those 20-somethings. One in particular: Treece McDavitt. Hank had noticed her—you could hardly miss the elaborate tattoos and double eyebrow rings—but he hadn’t really known her name. Until yesterday.

“We think it was Treece,” Charlie Herald had told him. “It was her last day, and this was her parting shot. Not that we could pin anything on her—she covered her tracks pretty well.”

Charlie, RightNow!’s VP of human resources, recounted the story as best as he had been able to piece it together. Treece was hip and edgy herself, a 26-year-old rebel without much of a cause, valuable for her many skills, but not exactly a candidate for Team Player of the Month. Evidently, she had been listening to lunchroom conversations about salaries and had heard all the usual speculation and innuendo about who made what. But where most people just gossiped and let it go, Treece got hot under the collar. She suspected unfairness. She was put out because she and her coworkers knew so little.

“Why shouldn’t we know what everyone makes?” she had blurted out one day to her lunchtime companions. “I’ll bet there are all kinds of disparities.” Everyone laughed and agreed, plunging into irreverent comparisons of what they imagined various managers were paid. One recounted an old IBM commercial in which a malevolent computer hacker e-mails his company’s payroll information to all his colleagues.

Treece had smiled. And then the conversation had gone on to other things.

Today, two months later, life was imitating Madison Avenue all too closely. Treece—if it was Treece—may have had help from a friend (another recent departure) who worked in HR. Or she may have relied solely on her own considerable computer skills. Whatever, as she herself might have said. No one seemed to think that Treece was a malevolent employee. “Just mischievous,” one person said. But it hardly mattered. Even as she made plans to leave the company, she somehow got access to HR’s files.

Yesterday was her last day, marked by a small farewell gathering and a few cupcakes. This morning, every RightNow! headquarters employee came in to work to find a camouflaged e-mail waiting on his or her computer. The e-mail bore an attachment, which listed the current salary and most recent bonus of every one of the 165 people who worked in the building.

When Hank had arrived a little after 8:30, Charlie was waiting for him. The vice president got the CEO a cup of black coffee and briefed him. Hank listened but wasn’t unduly concerned. “So what?” he had said with a shrug. Everybody talks about money—they always have, always will. Chances are, everybody at the company already has a good idea of what everybody else is making. “Is this really a problem?” he remembered himself asking.

Charlie had looked straight at him. “It’s 8:30 in the morning,” he said evenly. “I already have four voice mails asking for appointments. I have to think people have something on their minds.” Hank asked Charlie to take some soundings around the company, and the two agreed to touch base in the afternoon.

But Hank was talking with store managers all day, and it was five o’clock before Charlie could finally catch him without a phone tucked under his ear. As Charlie walked in to Hank’s office, Harriet Duval followed. Harriet was RightNow!’s chief financial officer. She and Charlie were Hank’s top advisers. As they bustled in, a tune popped into Hank’s head and he suppressed a chuckle. Harriet and Charlie always made him think of the line about Iowans from the old show The Music Man: they could stand touching noses for a week at a time and never see eye to eye. Harriet and Charlie didn’t come from Iowa, so far as Hank knew, but the description did fit—which, of course, was one reason he found them both so valuable.

Charlie looked haggard. “It’s worse than we thought,” he said. Hank raised an eyebrow; Charlie went on, glumly. “Seems like nobody’s been talking about anything else. If you had walked the halls today, you’d have seen little groups all over. People are furious! My assistant Tammy says she’s never heard so much griping. And you know those voice mails I mentioned? I must have had a dozen people in my office today, every one of them upset over salaries.”

Suddenly reflective, he added: “Funny thing—some were teed off because they felt they were earning too little. You’d expect that, right? But others were mortified because now everybody could see they were making more than their buddies. They wanted to know how to handle it.”

“Some were teed off because they felt they were earning too little. But others were mortified because now everybody could see they were making more than their buddies.”

Harriet nodded. “For once, I have to agree with Charlie. People are really upset. Heaven knows I’ve fielded my share of complaints today. At the same time, though, I have to believe it’ll blow over in a day or so.”

Charlie shook his head. “I don’t think so. People get crazy when it comes to money—that’s why this company and nearly every other company in the world keep salaries confidential. We’re all scared of the reaction. Just today, four or five people actually threatened to walk. One guy even wanted another 30 grand!”

“People get crazy when it comes to money—that’s why this company and nearly every other company in the world keep salaries confidential.”

Hank started to ask a question, but Charlie held up a hand.

“Wait,” he continued. “You need to know the whole story, and it gets worse. You both know how tight the job market has been recently, especially for marketers experienced in this business. We’ve had to pay top dollar—and now everybody in the company knows that our four new hires in marketing make more than people who’ve been around for years.” He paused for effect. “And it really doesn’t help that three of the four new marketers are men in a department that’s almost all female. Can you say ‘lawsuit’?”

His listeners winced. “But it isn’t just in marketing, it’s all over. In the dot-com group, some of those 23-year-olds make north of $50,000. That doesn’t look so great to an old-timer in HR who’s pulling down $42,000. As for IT, well, don’t even go there. We hired that Russian programmer, Arkady, a few years ago at $38,000. He was ecstatic to get the job and is anything but a squeaky wheel when it comes to pay, so he’s had only a couple of increases since then. Meanwhile, we bring that young guy Josh in to do the same work. He knows he’s good, and he makes sure you know it. He negotiated a high salary when he came on, and he’s been relentless in pushing for raises ever since. Now he’s making $75,000.”

Hank and Harriet sat silent. Harriet reflected uneasily on how her controller—loyal, quiet Edith, who had been at the company more than 20 years—now knew that her salary was less than one-third of Harriet’s. Hank thought of Allan, his brother’s pal, who was laid off from a much larger apparel chain. To placate his brother, Hank had hired Allan to head up store relations and had matched his big-company salary. It was far more than what RightNow! would otherwise have paid.

And oh, yes: there was Max, Hank’s golfing buddy, who was hired as director of international marketing. Max was a great guy. His wife and Hank’s wife were close friends. On the job, he tried hard, but he never got the kind of results a savvier, more aggressive marketer might have achieved. His boss had never given him much in the way of raises, so he earned significantly less than others at his level. Now he—and everyone else—knew it.

Finally Hank spoke: “So we’ve got a real mess on our hands. And I guess I’m as much to blame as anybody. We’ve had to add so many people in the last couple of years. I’ve always told Charlie, ‘Get ’em in here. Pay them whatever it takes.’” He thought about mentioning Allan but then decided against it. “And I guess there have been cases where we haven’t brought the lower end up fast enough.” Charlie nodded tiredly.

“But wait,” Harriet said. “Are we really so different from other companies? Everywhere I’ve worked, there have been pretty big pay disparities. The fact is, you can’t really avoid it these days. You have to pay for hot skills—and you have to pay what the market dictates.”

“But other companies haven’t had their salaries released to the world,” Hank said. “And now we’re facing this staff meeting tomorrow with 165 teed-off people. Any thoughts about what I should say? Better yet, any thoughts about what we should do?”

“Tell them we’re going to keep making the salaries public. That we’re going to post them.” The speaker was Charlie.

Hank and Harriet smiled, ready to laugh at the joke. But Charlie wasn’t joking. He was staring at a spot on the floor, his brow furrowed. Suddenly he looked up. “I mean it. I’ve heard of a couple companies that do this. I think they’re on to something.”

Now Harriet was incredulous. “Are you nuts? This stuff going public is what’s causing all the trouble! A fire breaks out and we’re going to douse it with gasoline?”

“Bear with me—the idea isn’t as crazy as it sounds.” Charlie began to tick off his points on his fingers.

“For starters, consider how hard it is to keep salary information secret any-more. It’s all out there in cyberspace, available to anyone smart enough to get it. Think there won’t be another Treece?

“Point two. It would keep us honest. We’ve let our compensation system get out of control. You’re right, Harriet: it happens all over. But that’s no excuse. Put salaries up on the board, and you can bet the employees will help us make sure they’re fair.”

Harriet started to argue, but Charlie plowed ahead. “But the real argument is that it helps—heck, it forces—people to understand our business. We’ve always said we wanted employees to understand our costs and learn to think like businesspeople. Well, here in headquarters our biggest cost is payroll. You should have heard one of the conversations I eavesdropped on today. Somebody was grousing about what we pay the dot-com kids, and two other people jumped all over him. ‘Do you know how important those kids are to our future? Do you know what they could earn at one of those IT consulting companies?’ Those guys were thinking like CEOs. They shut the complainer right up.

“Besides.” Charlie allowed himself a small smile. “You gotta admit that we’d be cutting edge—a sure bet for a story in some big business magazine. Our name in lights.”

Harriet rolled her eyes. “Charlie, you aren’t thinking straight. You said it yourself—people get crazy over money. Do you really want us to spend all our time explaining to Arkady why he makes so much less than Josh?”

“But that’s my point,” Charlie retorted. “He shouldn’t make so much less. I know—we pay for performance. But is Arkady’s performance really only half as valuable as Josh’s? If it is, by the way, we should fire him.”

“Oh, come off it. You wouldn’t even be thinking about their pay if it weren’t for the mess we’re in right now,” Harriet charged.

“Maybe not,” Charlie agreed. “But I’m working on the ‘you get a lemon, you make lemonade’ approach. Sure, we have to say we messed up, we’ll be reviewing salaries, the usual blah blah blah. But what if we also say that we think of our employees as partners in the business and that we’ll entrust them with the same information every senior manager already has access to—that is, what people make. It’d knock their socks off.”

“And make them very nervous,” Hank interjected.

“Nope. Yesterday it would have made them nervous,” Charlie replied. “Today they already know the numbers. Now our job is to turn that into something positive.”

Harriet shook her head. She had a quick tongue, everybody knew, but she was unusual in her ability to cool off, gather her arguments, then disagree calmly and rationally, without putting people on the defensive. “Charlie, it’s a great idea—in theory. But we’re dealing with real people here, and where there are people, there are egos. The problem isn’t the disparities that aren’t justified; it’s the ones that are. We can fix the Arkady-Josh problem. But do we really want to tell Max—sorry, Hank, I know you’re friends—that he isn’t making more money because he’s awkward with clients? Or what about your own assistant Tammy? You know she gets a lot more than anybody else on the support staff, partly because she’s always there when some young kid has a problem. She’s probably talked a dozen of them out of leaving. If we try to explain that, you can just hear the other AAs.” She mimicked a petulant young administrative assistant: “‘Well, that’s not in my job description.’”

“We’re dealing with real people here, and where there are people, there are egos. The problem isn’t the disparities that aren’t justified; it’s the ones that are.”

The CFO leaned back in her chair, thoughtful. “All those differences in pay—they’re the result of stuff you could never talk about out loud. They reflect a hundred judgment calls that every manager makes about every employee every day. You couldn’t explain them, so you wouldn’t try. Instead you’d run the business like the postal service, paying everybody at a certain grade the same. Or you’d increase everybody’s pay with age, like in Japan. Maybe that’s okay for the government or for the Japanese, but no business in this hypercompetitive U.S. marketplace could afford it. Our best people wouldn’t stand for it.”

“Straw man, Harriet.” Charlie’s tone was earnest. “We’re not the post office, and I’m not against differences in pay. I just want reasonable differences.” He turned toward Hank. “Look,” he said. “This is a people business. We’re only as good as our buyers, our marketers, our programmers, even our support staff. And there’s this awkward thing about people—they have feelings. People don’t care what the market says about what they should be paid; they care what the company says—and they really care how much they make compared with the guy in the next office. If they don’t feel fairly treated, they get sullen. They do bad things, like leave at five o’clock when there’s still work to be done. Or just leave, period.”

“You talk like there’s some kind of fairness that everybody agrees on,” Harriet retorted. “There isn’t. People feel it’s fair if they earn more than the guy in the next cube. But do you really know anybody who thinks it’s fair if they earn less? And now you want to rub their noses in the unfairness? Or have us spend all our time trying to explain it?”

She, too, turned to the CEO. “Hank, Charlie’s heart is in the right place, except that it seems to have taken over his brain. Do what he suggests and we’re just asking for trouble. At the meeting tomorrow, you should listen sympathetically. You should make all the right noises about conducting a review, examining disparities, and so on. And we should do that, of course; we need to get our compensation system in order. But then we should beef up our computer security so that this never happens again and go about our business. People will continue to gossip for a while. But they’ll eventually forget about it.”

The two stood up, and Hank thanked them as they left the office. And then he began thinking, and thinking some more, until the sky outside his window turned dark. Charlie’s idea? Outlandish, no doubt. But some of his arguments weren’t totally crazy, particularly the notion that this would probably happen again sometime. Even if the company didn’t post salaries, maybe it could find some middle ground. An employee committee to advise them on salaries? Posting payroll costs by department, with no individual listings? Posting salaries by position, but with no names attached? Hank knew Harriet wouldn’t buy any of this. And maybe she was right. Maybe it would all go away.

But maybe they were missing an opportunity, as Charlie believed.

And just how mad were all those employees likely to be at the staff meeting tomorrow? Hank didn’t want to make them madder.

Now the night outside was lit only by a crescent moon and those relentless orange lights. The CEO continued to gaze out the window.

What should Hank do about the salary debacle?

Victor Sim is the vice president of total compensation at Prudential Insurance Company of America in Newark, New Jersey.

I can understand what Hank Adamson’s going through because, in a roundabout way, I’ve been there. My advice to him would be to act but not overreact. Overreacting could create problems that will be difficult to live with later. For one thing, he shouldn’t follow Charlie Herald’s advice and publish everyone’s salary. That would negatively affect employees’ privacy and RightNow!’s ability to compete for talent.

Let me explain why I feel for Hank. As a mutual insurance company, Prudential for years has been required to file with the New York superintendent of insurance the name, title, and compensation of all employees making more than $60,000. The law was designed to disclose the salaries of top executives, as an anticorruption measure to protect policyholders. But over the years, as salaries rose and the law wasn’t updated, it in fact applied to a large portion of the workforce.

For a long time, it didn’t matter much, even though someone could get all the data from the insurance department. But with the advent of the personal computer and e-mail, it suddenly became much easier to organize and circulate salary information. Then last year, someone posted all the salaries on the Internet. In response, we, along with other insurance companies, asked the insurance department to change its practice by posting the salary for each job but, except in the case of top executives, with no individuals’ names attached. Because there are dozens if not hundreds of people in most job categories, anonymity for most people was ensured when the insurance department agreed to our request.

Why did we push for the change? First, there’s a personal privacy issue. People who join Prudential don’t want their salary information made available to neighbors and friends. In the case of RightNow!, there’s no need to add insult to injury for someone like Max, Hank’s golfing buddy, who is making less than his colleagues. Second, there’s a corporate competition issue. Having the compensation of all employees disclosed in the marketplace makes the company more vulnerable to poaching. Competitors can target individuals, knowing what kinds of salaries they need to offer. The same thing could happen if, as Charlie proposes, RightNow! were to post all names and salaries on a company bulletin board.

“Having the compensation of all employees disclosed in the marketplace makes the company more vulnerable to poaching.”

Still, Hank needs to acknowledge to his employees that the company’s compensation practices need improvement. He should then establish a professionally designed compensation system—one with defined pay grades and salary ranges for each grade. Employees should be involved in the development of the system, contributing ideas on the salary ranges of different jobs and on how merit is actually measured. And the system should be open so that employees know their salary range and have a clear idea of where their job fits into the company’s pay structure.

This would allow employees to see how they’re being treated relative to others in the company. Without that openness, people end up comparing themselves against the salaries, real or imagined, of other individuals. This raises all kinds of emotional issues. And you’re never going to convince everyone that they’re being treated fairly in a one-to-one comparison unless you are willing to unearth the nitty-gritty details of each salary decision and air the dirty laundry of every employee.

One frequently cited problem of such a formal pay structure is that it doesn’t allow for flexibility in a tight job market, where you typically need to pay a recruitment premium above a job’s market value to attract people. One way to avoid paying such a premium, and to maintain the fairness of your salary structure, is to recruit individuals who you believe are ready for the job but have not yet been promoted to an equivalent job in their own companies. For example, a vice president who has been groomed for a senior vice president position at another company, but is waiting for a position to open, may jump at the chance to fill your opening for a senior VP. “Value hiring,” like value investing, allows you to pick up bargains, if you will, and pay the market value of the job you are filling.

Dennis Bakke is the CEO of AES Corporation, a $6.7 billion global electricity company based in Arlington, Virginia. He and AES chairman Roger Sant were the subject of the HBR interview “Organizing for Empowerment” (January–February 1999).

With all due respect to Charlie, Hank should start by eliminating the entire HR department: compensation should be in the hands of the employees themselves and their leaders, not some staff group. He should eliminate all salary guidelines and publish everyone’s pay. And he should require managers to collect input from others before setting an employee’s compensation.

To put this in perspective, you must realize that AES has a fairly unconventional approach to managing people. Our electricity plants and distribution companies around the world—and our 53,000 employees—have a lot of autonomy. We don’t have any public relations, human resources, or planning departments in the home office or in individual business units. About the only rule we have is that whenever people make important decisions, they have to seek—though not necessarily follow—at least one other employee’s advice. We do what we can to encourage an open and honest environment.

At the same time, I have to be honest: 14 years ago, Roger Sant and I suggested to our business managers that they publish people’s salaries. I don’t think any of them took our advice. The managers basically said that that they didn’t want to have to explain salary differences to every single employee. Over the years, some of the younger managers have started sharing more salary information. Although such openness is more difficult for managers, I believe it leads to a healthier work environment. You should indeed have a reason for the salary you set for each individual employee—and be willing and able to justify the differences.

Critics will say that an open-salary system constrains you from paying what is necessary to attract and retain the best people. But perhaps you shouldn’t be using money as a weapon in the fight for talent. In AES’s early days, I asked people I was recruiting to take a pay cut—not because they didn’t deserve the money but because I didn’t want money to be the reason people were coming on board. I want them to join because they value an environment where they can use all their gifts and skills without being squelched.

“Money shouldn’t be used as a weapon in the fight for talent. People should join the company because they value an environment where they can use all their gifts and skills without being squelched.”

Conversely, we don’t have a long vesting period for options because we don’t want to set up fences to keep people here one minute longer than they want to be. It’s the work environment—not the salary structure—that people ought to be thinking about. Make your company a rewarding and engaging and exciting place to work, and pay issues become far less consequential.

But, you might ask, aren’t job categories and guidelines necessary in order to ensure fairness? My feeling is that the entire area of compensation is over-managed. At AES, we have no salary grades. We don’t try to pigeonhole a person’s unique abilities and accomplishments into a job category.

Instead, before AES managers set the compensation of direct reports, they solicit feedback from other managers within their group and across the company—and often get the advice of the person whose compensation they are determining. Responses range from “Boy, that seems a little too high” to “Why is this bonus so low?” That shared information gives people a chance to ensure there’s some consistency and fairness across and within groups.

I should add that, while most of our businesses still do not publish salaries, we have a plant in Pennsylvania where employees just started setting their own individual salaries. We had tried this in the past and it was a disaster: the good workers set them far too low, and the bad ones set them far too high. But in the most recent case, the group followed our rule of getting advice before making any decision. So the individual employee, before setting his own salary, had to circulate his proposed compensation and get comments from his boss and colleagues. And the plant came in with salaries that were within budget. It’s fascinating what you can do without an HR department.

Ira Kay directs the compensation consulting practice at Watson Wyatt Worldwide, which advises companies on employee benefits, human resources technologies, and human capital management. He is based in New York City.

The delicate and challenging situation Hank faces could prove to be a big opportunity if he looks at it the right way and understands that his choice is not strictly about compensation policy but about corporate culture. Hank has a chance to embrace a more open culture at RightNow!—one that can have the positive effect of boosting the company’s financial performance.

Maintaining a relatively transparent salary structure falls into that category of corporate behaviors—eliminating executive parking spaces, involving lots of people in hiring, limiting the use of titles—that can contribute to a collegial and open work environment. Research we have done at Watson Wyatt indicates that companies with such an environment have higher returns to shareholders because they are typically more innovative and entrepreneurial.

Now that doesn’t mean you should reveal everyone’s salary, which would undermine the efforts of a fast-growing company like RightNow! to attract talent in a tight job market. If you’re going to publish everyone’s salary, you need to have internal equity—that is, similar pay for people with similar experience doing similar jobs. And internal equity usually clashes with paying people their external market value. After all, if you hire people from outside the company, you’ll typically have to offer them 20% to 25% more than what they currently make—and, in all likelihood, more than what their counterparts in your own company make.

You could change your hiring strategy and promote people solely from within, recruiting them out of college, training them, and moving them up the ranks. But when you’re growing rapidly, that isn’t possible. Consequently, in the booming economy of the past five years or so, internal equity has given way in most companies to the need to recruit and retain sufficient numbers of the right people. In such a situation, you simply can’t have an open-book salary policy.

Harriet Duval is absolutely right: if you have to pay new hires 25% more than people who are already in the same jobs, you can’t rub people’s faces in that. Nor can you immediately raise everybody’s salary to match the new recruits’ salaries. You’ll simply destroy your margins.

But now that the cat’s out of the bag at RightNow!, Hank has to act. A good managerial compromise, and a step toward the open culture that can enhance financial performance, would be to publish the salary ranges—or “bands”—for all of the jobs within the company. Each band will have enough variation to absorb most labor-market or individual-performance differences. High performers who are recruited from the outside might initially be paid above their salary band. But the goal would be to bring everyone within the band, typically by letting the band, and those within it, catch up with the higher paid employees over time.

Publishing salary bands lets people know how their pay compares with others’ in the same job and what their jobs are worth relative to others in the company. It lets them know the upside potential of their current job and their career opportunities within the company—all job openings should be disclosed to employees on the corporate intranet—without telling them what everyone else makes. Employees should be treated like adults, with access to as much company information as possible. But some information is just too personal to disclose.

“Employees should have access to as much company information as possible. But some information is just too personal to disclose.”

The publication of salary bands is only one of the moves that Hank should make to establish a more open culture. Taken as a whole, these measures would create an environment of trust and collegiality that, interestingly, might ultimately allow RightNow! to adopt Charlie’s open-book proposal.

People can build a career at a collegial company in a way that often isn’t possible at a place that hires mercenaries from the open market and spits out those who are having short-term performance difficulties. The psychological compensation that comes from working in a supportive environment of long-term commitment might make up for the slightly lower pay that would result from an open-book salary policy.

Bruce Tulgan is the author of Winning the Talent Wars (W.W. Norton, 2001) and Managing Generation X (W.W. Norton, 2000). He is also the founder of Rainmaker Thinking, a management consulting firm based in New Haven, Connecticut.

Hank is being forced to face the difficult issue of whether to make employee compensation transparent. But what he—and every CEO—should also be considering is something much more radical: whether employees’ pay, like contractors’ pay, should be negotiated based on the project and the value of the work being done.

Hank must realize the futility of trying to maintain salary secrecy in today’s information environment. Countless Web sites let employees examine salary surveys throughout entire industries. Individuals can also test their own true market value through the now common practice of continuous job shopping. What’s more, this job shopping can be done in a low-risk manner at job-search and talent-auction Web sites.

Charlie is right to consider that another employee down the road might access compensation data and repeat Treece’s e-mail mischief. But there’s a more important point: top executives, supervisors, HR professionals, and accounting people have always been in the know about individuals’ salaries. And people today—especially those in the workforce born after 1963, Generation X and Generation Y—are much more open about sharing and comparing pay information with their peers. With so much information swirling around today’s business landscape, more speculation about compensation will occur up and down the corporate ladder. Surely, accurate information is more constructive than speculation.

“With so much information swirling around today’s business landscape, more speculation about compensation will occur up and down the corporate ladder. Surely, accurate information is more constructive than speculation.”

Indeed, the growing availability of accurate information about the real value of workers’ skills, abilities, and output is critical to making the overall labor market more fluid and more efficient. That larger economic trend is too powerful for any one employer to overlook. Employers should not buck the trend.

Without wage transparency, market pressures cannot work their true magic and ensure that compensation reflects real value. We see this in the case study. One of the main reasons that Hank and Harriet are worried about the public disclosure of salaries is that they know their company’s compensation system is not entirely performance based. One solution is to make the system more rigorous so that it reflects real value.

Harriet says that even a fair system will seem unfair by employees whose feelings may be hurt. This concern is archaic and paternalistic. Employees must be sophisticated enough to understand their manager’s reasoning, to negotiate on their own behalf, and to make decisions about the relative fairness of salaries. True, some employees won’t succeed with that degree of pressure. But smart companies are looking for employees who respond to that pressure by becoming more valuable. And most employees won’t resent compensation differentials based on ongoing transparent pay-for-performance negotiations.

Every step of the way, managers must clearly define each employee’s objectives and tie rewards directly to meeting those objectives. The most important transparency factor is not whether employees know what others earn, but rather that all of them know exactly why they earn what they do and what they need to do to earn more.

Harriet and Hank make an important point when they say that intangible factors require managers to be subjective when evaluating employee performance. That’s why the ongoing negotiation process is so important. The worth of one employee’s work today is whatever the day’s negotiation yields. That kind of real market pressure on both employers and employees will drive worker productivity through the roof.

Managers at RightNow! will have to roll up their sleeves, negotiate short-term pay-for-performance deals with every employee on every project, measure every individual’s performance every day, and keep good contemporaneous records. Harriet is dead right: it’s going to be an extremely high maintenance system for managers. But if you want high productivity, you have to accept high maintenance.

John Case is the author of several books on business and management, and the editor of RetoolingCapitalism.com, to be launched later this summer.

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